賓州電力 (PPL) 2011 Q4 法說會逐字稿

Good morning.

My name is Amanda, and I will be your conference operator today.

At this time, I would like to welcome everyone to the PPL Corporation fourth-quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

Joe Bergstein, Director of Investor Relations, you may begin your conference.

Thank you.

Good morning.

Thank you for joining the PPL conference call on fourth-quarter results and our general business outlook.

We are providing slides of this presentation on our website at www.PPLweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements.

A discussion of factors that could cause actual results or events to vary is contained in the appendix to this presentation, and in the Company's SEC filings.

At this time, I'd like to turn the call over to Jim Miller, PPL Chairman.

Thanks, Joe and good morning everyone.

Thanks for participating in the call today.

As most of you -- I think all of you know, I'll be retiring from PPL at the end of March, so this will be my last earnings call with you.

Obviously, it's been a real thrill with serving PPL for the last six or so years as Chairman and CEO, and certainly has been a highlight of my career.

A lot of change, a lot of interesting transactions throughout this sector, and certainly many, many, many challenges that we've tried to seek finding the opportunities within the realm of challenge.

I would say that PPL's fundamentally a very strong Company, and we've made significant progress over the past few years in further strengthening the foundation which we can continue to grow the value for the shareowners, and I'm real confident that you're going to see the best years of PPL ahead as a result of the work we've done over the last several years.

We've got a great team in place, and under Bill Spence's leadership, I'm sure he'll turn that confidence into a reality.

So I thank all of you on the phone for your interest in the Company, and for your diligence in assessing PPL's performance over the years of my tenure.

So I wish each of you continued success and good fortune in your areas out there and again, I think you'll see PPL flourish under its new portfolio structure, and a lot of opportunities lie out there ahead for us.

So today I'll talk just a little bit about the overview of 2011 results and talk a little bit about our positioning for the future.

Then Bill will provide an overview of our 2011 operational performance, a review of future prospects for each of our business segments, and a bit of discussion on our 2012 earnings forecast.

And then Paul Farr, our Chief Financial Officer, will provide very detailed financial review before we turn to your questions.

As you saw in the announcement, fourth-quarter earnings of $0.69 per share compared with $0.73 in the fourth quarter of 2010.

Earnings from ongoing operations for the fourth quarter were $0.70 per share, compared with $0.83 in the same period a year ago.

Our reported earnings and our earnings from ongoing operations were each $0.13 per share lower than a year ago, due to dilution from the April 2011 common stock issuance.

For the quarter, both reported earnings and ongoing earnings were pressured by lower wholesale electricity margins at our Supply segment.

Turning to the year-end results, we announced 2011 reported earnings of $2.61 a share, an increase of $0.44 per share over 2010.

Our 2011 earnings from ongoing operations were $2.72 per share, compared with $3.13 per share in 2010.

The 2011 earnings from ongoing operations reflect dilution of $0.75 per share, due to the June 2010 and the April 2011 issuances of common stock to fund the Kentucky and UK acquisitions.

Strong 2011 results were driven by solid performance in each of our business segments, and I'm also pleased that we were able to announce this morning a rough 3% increase in our annualized dividend.

Our quarterly dividend will now be $0.36 per share.

The increase is further indication of our continued confidence in the strength of our portfolio and our prospects for future growth of the Company.

Before turning the call over to Bill and Paul, I'd like to review some of the significant factors that position us well for the future.

Clearly, we think our business mix has shifted significantly towards rate-regulated earnings, providing a stability and security to our earnings forecast, dividend, and credit ratings.

Approximately 70% of our projected 2012 earnings per share will come from regulated businesses, and we expect compound annual rate-based growth in these businesses of nearly 8% over the next five years.

That growth would result in an $8.1 billion increase in the asset base of our regulated companies by 2016, the equivalent of adding another large regulated utility to the portfolio.

Much of this rate-based growth comes from planned CapEx that's already been reviewed by various regulators with very little lag in earning a return for shareowners.

The business mix improvements we've made over the past two years have resulted in an Excellent business risk profile rating from S&P, putting us in a category with only two other companies in our sector.

So our stable earnings mix also makes our dividend more secure and gives us a platform for continued growth.

And while wholesale electricity prices remain depressed, our high-quality competitive gen fleet provides upside in stronger energy markets.

Base load plants in PJM are complemented by a flexible mix of gas-fired units that will position us well in the largest wholesale market in the world.

Fuel mix of our fleet differentiates PPL from many other power producers in this sector.

Diverse fuel mix provides us competitive advantages in a variety of market conditions over fleets that are heavily dependent on one fuel source.

Over the past several years, I believe that our management team has consistently proven its ability to make the right strategic and tactical calls.

Already, our team in the UK has made meaningful improvements in the Midlands operations, achieving the financial objectives we announced at the time the deal was signed and subsequently financed.

While we have accomplished a great deal, challenges certainly remain.

I'm confident, however, that Bill and his team of excellent executives will continue to turn these challenges into opportunities and growth for our shareowners.

So I'll now turn the call over to Bill, PPL's new CEO.

Bill?

Thanks, Jim, and good morning, everyone.

I'd like to first take this opportunity to thank Jim on behalf of the executive team and all the employees of PPL for his outstanding leadership in the Company over the past six years.

In guiding PPL through a very challenging time, Jim not only ensured the Company weathered challenging market conditions, he led the implementation of the strategy that has significantly strengthened the Company.

Under Jim's leadership, PPL fundamentally repositioned itself, with two transformational acquisitions, an aggressive hedging program that has added tremendous shareholder value and operational performance that ranks among the best in our industry.

Congratulations, Jim on an outstanding career, and thanks for all you've done for PPL.

I'm honored also to have been selected to carry on your excellent leadership and speaking of carrying on, let's turn now to slide 6.

As Jim noted, 2011 was a very successful year for the Company.

PPL has had now 12 consecutive quarters of very solid performance and three consecutive years of exceeding the midpoint of our ongoing earnings guidance.

And as Jim mentioned, we've completed two transformational acquisitions in an extraordinary fashion.

In 2011, we seamlessly acquired and permanently financed central networks in the UK.

We implemented our integration plan very close to targeted costs, and at the high end of our expected range of synergies.

We overcame extended nuclear outages and poor market conditions in our Supply business, and our electric utilities in Kentucky and Pennsylvania provided solid results in a lackluster economy.

I'll briefly review each of the four business segments, starting with the UK.

Our WPD CEO, Robert Symons, and his team, developed a very aggressive efficient integration plan following our acquisition of the two central networks' utility operations last April.

I'm very happy to report that all of the significant operational integration is now complete and that Western Power Distribution is now serving over 7 million customers with a radical improvement in WPD Midlands operations in just nine months.

This is possibly one of the most dramatic changes ever made in the UK utility industry, and I expect WPD Midlands will now join WPD South West and WPD South Wales as the UK's frontier performers on several incentive measures.

These dramatic improvements are appearing in four key areas, percentage of customers restored to service within one hour of a high voltage fault, minutes that customers are without service, the number of customers without service for more than 18 hours, and the number of customer interruptions per 100 customers.

There are charts in the appendix of today's presentation that detail some of these significant improvements.

While these measures are expected to result in incentive revenue opportunities for the Company beginning in 2013, customers in the Midlands region of the UK are already seeing the benefits of our ownership and our proven operating model.

Our experience in the first nine months of operating the larger WPD has confirmed our belief that this acquisition will create significant benefits for our customers and PPL shareholders.

Turning back to the US, we achieved a significant milestone when the Kentucky Public Service Commission unanimously approved the settlement of a critical environmental cost recovery case for LG&E and KU.

As a result of the settlement and KPSC action, we now have the approval and the cost recovery mechanism to move ahead with approximately $2.3 billion in environmental upgrades necessary at our regulated coal-fired plants in Kentucky.

The agreement provides for a 10.1% return on equity for these projects, which will be completed over the next several years.

In Pennsylvania, our electric distribution operation certainly had its challenging year, facing two of the most damaging storms in the Company's history in just a two-month period, in addition to significant flooding in some areas of our territory.

In all cases, our experienced and dedicated crews did an extraordinary job restoring service to customers in very difficult circumstances.

In the restoration effort, we received excellent help from other utilities through our mutual assistance program, and from PPL sister companies, LG&E and KU.

Regarding customer service, PPL Electric Utilities, LG&E and KU have continued to garner additional JD Power awards.

In total, the three companies now have 32 JD Power awards, more than any other utility in the US.

Turning to the Supply business segment.

We were able to achieve our 2011 earnings expectations despite the extended outages at our Susquehanna nuclear plant, which cost us nearly $100 million in pretax margins.

Our team brought both units back into service within just six weeks, and they've operated reliably ever since.

And the rest of our Supply business, including our marketing operation and our other power plants, rose to the challenge, significantly offsetting the loss of nuclear output, demonstrating the value of our diverse fleet.

I'm also pleased with the work our coal group did in 2011, negotiating a long-term rail contract for coal delivery.

While the details of the contract are confidential, I can say that we were able to negotiate a multi-year contract that is expected to provide more stable coal transportation cost.

Coupled with our other transportation arrangements, we expect to maintain overall transport cost in the low to mid-$20 per ton range for the next several years.

In summary, over the past three years, PPL has made and financed bold acquisitions, completed swift integrations, and executed value-accretive generation hedges.

This is in addition to the strong operational and regulatory performance.

Our resulting business mix of high quality utilities and diverse competitive generation provides the strong foundation that Jim talked about, creating shareholder value.

As Jim said, we believe PPL's best years are yet to come.

Before discussing our earnings forecast for 2012, let me take a few minutes to review the positioning of each of the four business segments.

Starting with the International Regulated segment, the headline here is that the UK operation is a highly-attractive, rate regulated business with expectations of significant growth.

The UK regulatory system provides network operators with pre-approved, five-year forward-looking revenues, which are inflation-adjusted and take into account capital spending as well as O&M costs.

In addition, we have the ability to earn incentive revenues and we face no volumetric risk.

This results in a real-time return of and return on capital investment without the lag that is often the norm in the US-regulated businesses.

WPD is the top-performing electricity distribution business in the UK, leading the way in capital and operating cost efficiency, customer service, and reliability.

In the past seven years, we've earned more than $380 million of incentive revenues, the highest percentage of bonus revenue among UK electricity distributors.

As I mentioned earlier, we have completely transformed the Midlands operation in just nine months, clearly positioning us to earn additional incentive revenues.

PPL Kentucky operations represent a very positive case of what you see is what get.

LG&E and KU are efficient, well-run utilities that are also projected to have significant rate-based growth in the coming years.

As the result of a constructive regulatory climate that's focused on the long-term needs of customers, we have in place mechanisms that provide for timely return on a substantial portion of the CapEx plan over the next five years.

We currently estimate compound annual growth in our Kentucky rate base of 9.6% over the next five years.

We're also forecasting significant growth in both our transmission and distribution rate base in Pennsylvania.

On the transmission side, we now estimate a compound annual growth base rate of nearly 22% through 2016.

This is driven by the 145-mile Susquehanna-Roseland transmission project, and other initiatives to improve aging transmission facilities in Pennsylvania, including a recently-announced significant new project in the Pocono Mountain area.

There's been some recent positive developments regarding the approval process for the Susquehanna-Roseland line and we hope to receive approval from the National Park Service before the end of this year.

We're also continuing to upgrade aging infrastructure on our distribution system, which covers 29 counties in Pennsylvania.

Our distribution improvement efforts are expected to result in a 6% compound annual base growth over the next five years.

A related positive development on this front comes from a legislative initiative to provide an alternative rate making mechanism in the state.

This mechanism would permit the Pennsylvania Public Utility Commission to authorize recovery of costs for pre-approved infrastructure improvement projects through a distribution system improvement charge.

This legislation was passed by the State House and Senate within a year of being introduced.

The Senate bill passed unanimously, and then moved back to the House for concurrence, where it also passed unanimously just this past Tuesday evening.

Pennsylvania Governor Tom Corbett has been supportive of the legislation and we would expect him to sign the bill within the next week.

The legislation will take effect within 60 days of the Governor's signing, and we would anticipate the model tariff and other PUC guidance to be completed this year and companies would then be in a position to file for recovery using the new mechanism early next year.

While the industry continues to face the challenge of low wholesale power prices, our competitive generation business continues to be well-positioned, having the diversity to capture value in a variety of market conditions.

In PJM, we have more than 2,400 megawatts of low marginal cost nuclear and hydro facilities, in addition to the 2,800 megawatts of efficient, supercritical coal units that have state-of-the-art emission control equipment to put them substantially in compliance with new emission standards without any major investments.

We do not believe current forward prices reflect the cost to comply with MATS or CSAPR rules, and industry-wide expected coal plant closures.

Our fundamental analysis suggests forward power prices are not reflecting the incremental cost necessary to comply with EPA rules, which we estimate to be in the $3 to $5 per megawatt hour range.

Of course, not withstanding this fundamental analysis, the current market reality is power prices remain soft.

PPL is well-positioned in these challenging markets and I point to a couple factors.

We've been very successful in hedging our generation for 2012 and 2013 and have one of the strongest hedge profiles in the sector, but beyond hedging, I believe an often overlooked and highly attractive aspect of our fleet is the more than 2,400 megawatts of gas-fired plants we have in PJM.

Our gas-fired assets are capturing an increased share of the market as they've been running at near base load production levels.

For example, in 2011 they ran at a combined capacity factor of 78%.

That's up from 43% in 2009.

Our gas fleet can benefit from lower gas prices displacing less-efficient coal units.

This should help to offset some unhedged dark spread risk associated with our coal assets.

Of course, this is precisely the benefit of fleet diversity.

Our flexibility in fuel type, dispatch response, and technology type provide opportunities and reduce volatility under a variety of market conditions.

And to further enhance our fuel diversity, we are exploring options to operate some of our coal units with natural gas.

Turning to the next slide, we provide a regular look at hedge positions for 2012 and 2013.

We've increased hedge levels for both years, and provided a range for our hedges, reflecting potential variability in generation production and our use of options.

Each can cause some variability in the hedged volumes.

Focusing on 2013, the additional hedges were primarily for off-peak power.

You may remember that during the second quarter call we actively hedged 2013 to capture an increase in power prices, and at that time I indicated those hedges were biased towards on-peak power.

The hedges we executed since the third quarter essentially bring our book in balance between on-peak and off-peak.

Looking at the intermediate and peaking data, you can see we've increased our expected production from the gas-fired units caused by the market dynamics that I described earlier.

This increase partially offsets our lower expected output from the base load coal fleet.

Before I turn the call over to Paul, let me summarize our 2012 earnings forecast and then ask Paul to take you through the details.

This morning we announced a 2012 earnings forecast of $2.15 to $2.45 per share.

While this forecast is as expected, lower than the results we achieved in 2011, I want to highlight several important points before Paul provides a detailed review of our 2012 guidance.

The largest driver is an expected decline in energy and capacity margins from our Supply business, as higher-priced hedges are rolling off.

I don't think that's a surprise to any of you on the call.

The lower Supply margins are partially offset by four additional months of earnings from the Midlands utilities.

Again, I don't believe this is unexpected, however, it's important to note that our forecast for International exceeds the expectations relative to 2012 net income we previously communicated to you.

As you will see from Paul's slides, and what may not be as expected, we are planning to spend significantly more on improving our customer service and reliability in Pennsylvania and Kentucky.

This increase amounts to about $0.15 per share compared with spending in 2011.

As you know, many utilities including PPL were hit with devastating storms in 2011.

While PPL companies responded very well, we believe there are areas for improvement that will help us do an even better job when faced with such challenges in the future.

We believe a proactive approach will not only improve service to our customers but it will maintain or improve our regulatory margin as we face rate proceedings in 2013 and beyond.

Finally, I wanted to highlight that our Supply business operating expenses in 2012 are roughly $0.10 per share higher than 2011.

This increase is driven by more planned fossil outages and higher costs at our Susquehanna nuclear plant, some in response to anticipated NRC initiatives.

In closing, I'd say that 2011 was another solid year for PPL, particularly in terms of challenges met and opportunities seized.

We're well positioned for 2012, and our announced dividend increase reflects our optimism in the PPL strategy.

Now, let me turn the call over to Paul.

Thanks, Bill and good morning, everyone.

Let's move to slide 13 to review fourth-quarter and year-end results.

As outlined on this slide, the largest positive driver of earnings from ongoing operations in the fourth quarter came out of the UK and was primarily due to earnings from the Midlands acquisition.

This positive driver was more than offset by the combined impact of dilution of $0.13 per share as a result of the common stock issued in April to fund the Midlands acquisition, and lower energy margins as we expected.

Full-year 2011 earnings from ongoing operations were favorably impacted by the financial performance of our utilities in the UK and Kentucky.

These positive drivers were offset by dilution of $0.75 per share resulting from the common stock issued in June 2010 to fund the Kentucky acquisition, and the common stock issued in April of last year to fund the Midlands acquisition.

As forecasted, our Supply segment had lower margins in 2011 compared to a year ago.

Because the Kentucky acquisition did not close until November 1, 2010, the fourth-quarter results are not fully comparable.

However, I'd like to remind everyone that the Kentucky Regulated segment earnings include four major items.

The operating results of KU and LG&E, the holding company costs at LKE, interest expense associated with the 2010 equity unit issuance and dilution of $0.11 per share.

Let's move now to the International Regulated segment earnings drivers on slide 14.

Our International Regulated segment earned $0.87 per share in 2011, a $0.34 increase over 2010.

This increase was due to the operating results of the Midlands utilities, net of interest expense of $0.05 per share associated with the 2011 equity unit issuance, higher earnings in WPD's legacy businesses, resulting from higher delivery revenue, primarily driven by higher prices, and a more favorable currency exchange rate.

This was partially offset by higher pension expense, higher income taxes, and dilution of $0.24 per share.

Moving to slide 15, our Pennsylvania Regulated segment earned $0.31 per share in 2011, a $0.04 increase over 2010.

This increase was the net result of higher delivery margins, primarily due to the distribution base rate increase that went into effect in April 1 of last year, lower O&M, lower taxes, primarily due to a Pennsylvania state tax benefit that was related to the 100% bonus depreciation last year, and dilution of $0.09 per share.

Turning now to Supply on slide 16.

This segment earned $1.14 per share in 2011, a decrease of $1.13 per share compared to 2010.

Lower earnings in this segment were driven primarily by lower energy margins as a result of lower energy and capacity prices in the east, lower base load generation, lower basis, and higher delivered coal prices.

This was partially offset by higher margin on flow requirement sales contracts.

Also impacting 2011 results were higher O&M at Susquehanna and our fossil and hydroelectric stations in the east and the west, higher income taxes, primarily due to valuation allowances on Pennsylvania net operating loss carryforwards that were driven by lower projected future taxable income, including the impacts of bonus depreciation and lower forward energy prices.

Finally, dilution of $0.31 per share.

Turning now to slide 17.

As Bill already mentioned, we are announcing our 2012 earnings forecast range of $2.15 to $2.45 per share, with a midpoint of $2.30 per share.

This slide shows the year-over-year change in earnings by key drivers within each segment.

The $0.13 impact of dilution has been removed from the segment earnings, and is shown as a separate line item on the graph.

We expect increased earnings from the International Regulated segment, primarily due to an additional four months of earnings from the Midlands businesses, basically our four highest earning months of the year, and an annualized increase in delivery revenue of 9.5% effective April 1.

Partially offsetting these positive earnings drivers are higher O&M, higher depreciation, higher income taxes, and a less favorable currency exchange rate.

We expect lower earnings from our Supply segment in 2012 compared to 2011, primarily due to lower energy margin as a result of lower energy and capacity prices and higher fuel costs, partially offset by higher nuclear and coal generation output.

Higher O&M, primarily due to an additional planned outages at our Eastern fossil and hydroelectric stations, higher depreciation, higher income taxes and an assumption of lower realized nuclear decommissioning trust earnings than we experienced in 2011.

The lower earnings from the Pennsylvania Regulated segment are primarily due to higher O&M as a result of planned increases in system reliability work and customer service costs, as Bill mentioned, and higher depreciation, resulting from higher plant in service.

We also expect higher income taxes as a result of the 2011 Pennsylvania state tax benefits related to bonus depreciation that will not continue into 2012.

These negative earnings drivers are expected to be partially offset by higher delivery revenue, primarily on the transmission side of the business.

We expect lower earnings from the Kentucky Regulated segment due to certain regulatory initiatives in the areas of customer service, gas pipeline safety, and infrastructure security.

Increased operating and maintenance costs from additional power plant outages, and higher baseline spending.

We also expect higher depreciation as a result of higher plants in service.

These increased costs will be partially offset by higher budgeted electricity and gas margins due to expected load growth, a growing ECR rate base and base rate increases from Virginia and the FERC.

On slide 18, we provide updates on our free cash flow before dividends.

For 2011, this graph obviously excludes the impact of approximately [$5.8 billion] necessary to fund the Midlands acquisition.

Our 2011 projected free cash flow before dividends has not changed materially since the third-quarter call.

A decrease in actual capital expenditures was due to lower capital spending in the Supply and Kentucky Regulated segments, partially offset by higher capital spending in International.

The changing CapEx was almost entirely offset by a change in other net investing activities.

The largest driver of 2012 free cash flow before dividends is projected capital expenditures of $3.8 billion, primarily in our rate-regulated businesses.

The details of our projected capital expenditures and related rate-based growth can be found in the appendix to today's presentation.

Partially offsetting the increased capital spending is higher expected cash from operations in the International Regulated segment, primarily due to the additional four months of Midlands operations versus 2011.

Cash from operations also reflects projected pension contributions of around $400 million for the year.

Due to large fluctuations that can occur in certain cash flow items like changes in working capital and collateral requirements on power hedges, starting in 2012, we no longer plan to discuss quarter-over-quarter changes to our year end projections of free cash flows before dividends.

We will provide an annual estimate of free cash flow before dividends for the upcoming year at the time we announce earnings guidance.

You can obviously track the Company's actual free cash flow before dividends using our SEC filings, though.

Turning to slide 19, as Jim mentioned earlier, we have raised the annualized dividend 2.9% to $1.44 per share, effective with the April dividend payment.

This dividend level represents a 63% payout ratio based on the midpoint of our 2012 earnings forecast, and is expected to be more than covered by our rate regulated earnings.

The combination of the acquisitions we completed over the last two years, the diversity of the competitive generation fleet and the growth prospects of our utility businesses clearly permit us to look at flexibility in growing the dividend in the future.

With that, I'd like to turn the call over to Jim for a question-and-answer period.

All right.

Thanks, Paul.

Operator, open the call up for questions, please.

(Operator Instructions).

Your first question comes from the line of Marc De Croisset from FBR Capital Markets.

Your line is now open.

Good morning, everyone.

I just wanted to ask a brief question about the earnings trajectory, or the trajectory for EPS growth, if you could comment on it.

On previous calls, you mentioned your expectations for higher power prices in 2013 and 2014, and it looks like you still hold that view.

But for the moment, we basically have a stay in CASPR, we've seen substantial decline in forward natural gas and power prices, so if this actually materializes, given these facts, do you see enough drivers on the regulated side to offset those headwinds and any impact from the converts to drive earnings growth in 2013 and 2014 from 2012?

Okay.

Thanks for the question.

One of the reasons why, obviously beyond just having rate case filings that we expect for next year, likely on multiple fronts, clearly the commodity markets are dynamically changing.

The environmental regulation stays obviously make it difficult to predict earnings on an intermediate forecast basis.

I would expect, as we look at current forward power prices, that we would be able to offset much of the decline that could come from margin declines with rate-regulated earnings growth, with combination of those rate case filings I talked about.

The ECR spending in Kentucky, the normal formula rate adjustments that we've got coming through the FERC jurisdictional transmission in Pennsylvania electric utilities.

As well as, obviously, in this year, in 2013, on an annualized basis starting April 1, I talked about the 9.5% revenue increase for that asset base, and that's going to continue to grow in 2014 and beyond.

I'd expect we would be able to offset much of it.

The question is obviously what happens between now and the time that we layer in the hedges that secure most or all of 2013, which I wouldn't expect to happen until we move further into the year, obviously, and then 2014, as we talked about in the past, is fairly open.

So it just depends upon what happens in those commodity markets.

I think from what we have control over, we've executed very well in terms of the rate case filings and the settlements in those areas, and I would expect we'd do the same in 2013.

The thing we don't have control over is the commodity markets.

Marc, this is Bill.

I would say that for 2013 given that we're already over 80% hedged, we feel very good about earnings per share growth for 2013 as we sit here today.

I think Paul highlighted some of the other risk in 2014 and beyond, that we're going to have to deal with.

But the fact is, with the mix that we have today, we are very much well-positioned to combat something like this compared to where we were 18 months ago.

I think as we sit here today, we really feel great about the transformational acquisitions we've done, and where we are relative to the commodity cycle.

Your next question comes from the line of Ameet Thakkar with Bank of America-Merrill Lynch.

Your line is now open.

Good morning.

Just had a couple quick questions.

It looks like the 2012 EPS guidance looked like you guys have a bit of a wider range than you historically have, $0.10 wider, and given I guess one-year hedge levels where they stand for 2012 and a greater proportion of regulated earnings, I was wondering what kind of drove the wider range for this year?

There were a couple things there.

Obviously, with the volatility in the commodity prices, even though we are substantially hedged, there's still the intermediate and peaking units that are open.

There's still some unhedged base load generation.

That's clearly a significant factor.

With international, even though things are going very well, and we're actually, as I mentioned in my prepared remarks, forecasting net income well above even the upper end of the range we gave during the road show on the equity offering, we're still only nine months into the business.

So there's potential variability there.

Of course, with the economy being what it is, that's going to be a factor in addition to weather, of course.

So those are some of the factors that went through our minds as we looked at the range.

I think also we've got -- for 2012, we've got about, between actual results, where the currency rates are locked and the hedges that we've got in place, about 82% of budgeted total year earnings are hedged from a UK standpoint, but there's still a little bit of an open position there.

Interest rates can move on us.

They can affect the industry linked bonds in the UK.

I think it will clearly take a combination of significant items to move us to the top or bottom end of the range.

But we felt like given the very -- Bill mentioned weather.

Weather was a fairly significant headwind for us in the fourth quarter.

Very temperate in both Pennsylvania and Kentucky.

It's been very temperate in Jan, Feb so far, so we just felt it was prudent to give a range that if a combination of items were to hit us, the range would be broad enough to accommodate those items.

But I would say, we feel very good about the midpoint of the range and confident that's an achievable target.

Your next question comes from the line of Paul Fremont with Jefferies.

Your line is now open.

Thank you.

I guess my first question has to do with, based on your projected level of contribution from the regulated companies in Pennsylvania and Kentucky, adding Kentucky, what type of ROEs does that -- earned ROEs does that get you to in 2012?

In 2012, that would get us to -- on the Pennsylvania regulated front, I'll leave the UK to the side because we've talked about the UK in the past and where we get the low double digits to middle double digits unlevered and get into the low 20s on a levered basis, everything is pretty much fully on plan in that front.

We were in the -- with the benefits of almost $0.04 of bonus depreciation benefit in Pennsylvania, given the 10% to 11% in 2011, I would expect with that not recurring and with the spending plans that we've got for the customer and reliability initiatives we talked about, that we would be in the mid-single digit range for Pennsylvania Electric.

And then in Kentucky, it's going to be in the 8%-ish range, factoring in at the operating companies and not factoring in goodwill or anything like that, given where we expect the spending plans in those businesses to be as well.

(Operator Instructions).

Your next question comes from the line of Michael Lapides from Goldman Sachs.

Your line is open.

Hi, guys.

Actually, a couple questions.

First, on O&M cost, in the US both at the regulated segments and at supply, what are you kind of -- what's kind of embedded as a percentage year-over-year increase from 2011 to 2012 and how much of that is pension versus kind of true kind of labor and materials-related O&M?

Of the -- when I look at the O&M across the board for -- so if you're focusing on slide 17 and leave international regulated off, pension year-over-year domestically is $0.03, rounded out.

It's another $0.01 in the UK.

So it's a total of $0.04 from an ongoing earnings perspective related to pension.

Everything else would relate to either movement or higher levels of power plant outage experiences in both Kentucky and in the Eastern fleet, as I mentioned in my comments, and then inflationary spending around wages and other benefits and things like that.

So those would be the biggest drivers.

There are specific NERC-specific related items in Kentucky.

There are customer service initiatives in responding to an audit that we went through last year in Kentucky that requires some cost support.

The additional reliability-based measures that Bill talked about in electric utilities that are several cents a share as well.

Only about $0.04 in total globally is pension, $0.03 domestic.

Michael, the way I'm looking at it, about half of the increases year-over-year are driven by the normal labor escalation, the pension costs that Paul mentioned.

The other half are initiatives specifically focused on customer service and reliability.

Clearly, we expect to recover those in a rate filing as well.

Okay.

And if I look at the coal hedging for 2013 in the east, for the Eastern fleet, if that's delivered ton and it includes rail, and if it's low to mid $20s per ton of transport, that's implying like roughly $60, $62 a ton of delivered coal, a little bit below where we've seen over the last 6 to 12 months, kind of the forward Appalachian coal prices range.

Just curious, are you able to -- are you benefiting somehow from proximity from mines?

Are you signing longer-term contracts, so at lower prices, but giving the mining companies a little more certainty over the longer term.

Do you have some other form of buyer power?

Can you give any color along that?

Sure.

You're spot on in terms of the cost at the mine mouth, if you will.

And that is really a function of longer-term contracts that we had negotiated some time ago, and many of those contracts have collars that limit the increases.

Of course, they also limit the decreases as well in a very soft market, but you're seeing the benefits, at least in 2012 and 2013, of the strategy we put in place a number of years ago to lock in a substantial amount of the coal at very favorable prices.

Your next question comes from the line of Julien Dumoulin-Smith from UBS.

Your line is now open.

Good morning, guys.

First question, with regards to the same hedging slide, just wanted to kind of touch base on the expected generation number there.

You talked about the offset from your gas portfolio.

How much of the change down here is from coal, and how much of an offset are we getting just if you could provide that in terms of terawatt hours.

How much is one offsetting the other there?

If you take a look at the slide and compare it to where we were at the end of the last quarter, on the 2012 side, expected generation in the intermediate went up from 6.2 gigawatts to 6.9 gigawatts.

So that's a substantial increase there.

That is displacing, if you will, some coal generation, not so much our own coal generation, but other less-efficient units in the market.

On the base load side, you see most of the drop is in the east, although there is some drop in the west quarter-over-quarter.

And for 2012 for example, we're at 46.2 gigawatts at the end of the last quarter, and we're at 45.5 gigawatts in the east this quarter.

That drop is really a combination of two things.

One is, more planned outages on the coal fleet, but also less run time, particularly in the off-peak hours from the coal fleet based on the current soft power prices.

All right.

Great.

There's nothing from the gas side now baked into base load for whatever its worth; right?

Correct.

It's all down below.

Even though it may be running as base load we're still -- we still categorize it in the intermediate to peaking area.

Perfect, and then a follow-up on the rate implementation.

Assuming everything gets signed in Pennsylvania, wanted to see, does this impact your timing of a rate case this year?

Are you still going to go in and file a rate case this year and next year go in and sort of true that up with the implementation?

Correct.

We would not anticipate any change in the rate filing we would make, which we would expect to file at the end of the first quarter here with the rates effective 1/1/2013 for that base rate case.

For the enhanced disc, if you will, this distribution infrastructure charge, we would expect to file that in the first -- hopefully in the first quarter of next year.

It would not be combined with the base rate case.

I think if you read the legislation, you know that you have to have it filed within the last five years of filed base rate proceeding, which we will have had.

So we would use that as the basis for the launching off point if you will for the disc.

Great.

Last question, just more broad.

When I look at hedging the supply business, seems that you guys might be pursuing a little bit less full requirement, perhaps more on sort of residential retail or what have you.

I just wanted to get latest thoughts in terms of how you anticipate pursuing the various sales channels on that front?

Sure.

As I mentioned previously, we do look to have a balanced portfolio in terms of types of products that we -- and options that we use to hedge the fleet.

So there is a combination of straight sales at West Hub that are just fixed price.

There's a combination of collars, and then we have retail as well.

At this point, the retail load is not a large piece of the hedge portfolio.

It's growing, but it's probably one of the smaller pieces.

It's really dominated right now, the hedges are, with fixed prices and collared products.

Thanks for the clarity.

Appreciate it.

Sure.

Your next question comes from the line of Andy Bischof with Morningstar.

Your line is now open.

Hi, good morning.

Just a quick question for you in regards to MATS.

What do you think is kind of the likelihood that MATS rules basically will challenge [any requirements] you think someone would base that legal challenge on?

I'm sorry, it was a little hard to hear the question.

I'm sorry.

What do you think is the likelihood that the MATS rule will face legal challenge and what grounds do you think someone would base that legal challenge on?

That's so hard to predict.

I don't think we have a feel at this point for whether it will be challenged.

My guess is, that like all these rules that have come before it, there will be some type of challenge.

How it's challenged, I really can't say.

Okay.

Thank you.

Your next question comes from the line of Daniel Eggers with Credit Suisse.

Your line is now open.

Hi.

Good morning.

This is actually Kevin.

On the UK operations, what level of incentive and bonus revenues are you assuming in 2012 guidance?

In 2012 it was GBP18.7 million.

So annualized from April -- that was based upon the results through March 31, 2011, call it test year or accomplishment year.

We would expect -- so that would affect revenues from April 1, 2012 to 3/31/2013.

We would expect to basically double that amount for the next year.

That would be ending here, come March 31, 2012.

So from April 1, 2013 through March 31, 2014, it's instead of $30 million, it's closer to $60 million.

Okay.

Thank you.

And then with the dividend, with the big increase, I guess what is your dividend policy now and how do you expect to grow it in the future?

We don't really formally have a policy.

We focus very heavily on clearly ensuring that the rate regulated utilities can more than fully cover the dividend.

What I'd say is that we're trying as best we can to grow the dividend, but at the same time, we've got very significant growth opportunities and capital, capital that we can deploy in areas where we earn basically an immediate recovery.

So I would expect, when you look at kind of the trajectory of earnings of the rate base and therefore net income growth in the regulated utilities, it will be at a fraction of that, whether it's a third of that amount or half of that amount, I'm not entirely certain.

There is an element that does depend upon, as things kind of fall into line around the fundamentals around supply, we do consider supply, and I know that's not probably as specific as you want, but we don't target a specific payout ratio.

Okay.

Thanks.

Last question is, for 2012 guidance, are you assuming $300 million to $350 million of equity through your DRIP and DRIBL programs?

Yes.

That same -- we're at $350 million for 2012 as we discussed previously.

That includes $75 million related to the DRIP and management comp, so it would be an incremental $275 million of issuance.

If the commodity market stays soft I could see that staying at that level for the next couple years.

When markets looked at a little better, we were looking at amounts less than that over the next couple of years, so that will be a little bit dynamic but I wouldn't see it moving materially at all from that $350 million over the next several years.

Great.

Thank you.

Your next question comes from the line of from Reza Hatefi from Decade Capital.

Your line is now open.

I'm sorry, my question was just asked.

Thank you very much.

Your next question comes from the line of Geoffrey Dancey with Cutler Capital.

Your line is now open.

Thank you.

I'm curious what you see in terms of further switching from coal to natural gas, and how important it can be for you, and just your broad observations on it sort of across the industry.

Sure.

I think as we've already begun to see, there's a significant level of switching going on now, and I would expect that to continue with these soft natural gas prices.

For us, as I mentioned in my opening remarks, our capacity factor on our gas units was up around 78% last year, and roughly almost double what it was two years before that.

So we are seeing with our fleet, as I'm sure others are, significant additional run times as gas continues to go down, if the margins continue to improve, there's clearly some upside for those of us that have the capability to use these gas assets.

What about just the considerations for new plants coming on?

How long, and how low do you need to see natural gas prices before you think new plants come on, based off of natural gas?

Well, I think that's heavily dependent not only on the energy price but also on where capacity prices clear in the forward markets.

I think if you look at the current capacity prices that have cleared in the last few auctions, coupled with where energy prices are today, I don't think it would even clear the economic hurdles that you'd need to incent new generation.

Having said that, as more coal units retire, certainly the largest beneficiaries from a technology standpoint are going to be gas combined cycle units, and those typically take from on a greenfield site, you're talking about a minimum of three years between permitting and construction to put those into play.

Okay.

Thanks.

Your next question comes from the line of Marc De Croisset from FBR Capital Markets.

Your line is now open.

Thanks.

Just a quick follow-up.

You mentioned you were lightly hedged in 2014.

I'm wondering if you might give us a little more indication around that.

Is that a 20%, 30% hedging in 2014 or are you substantially open at this point?

We're less than 20% out in 2014.

2010 and 20%.

Thank you.

I was going to note that we will probably -- when we substantially hedge more of 2014, we'll obviously add that to our slide deck in the future, but for right now, given that it's in that 10% to 20% range, we didn't think it was meaningful enough to put it onto the slide.

Thank you.

And maybe you commented on this.

I don't recall exactly.

But on slide 17, you have other as a headwind between 2011 and 2012.

Can you describe a little bit more what is in that bucket?

Yes, and I talked about it at a high level in my remarks.

This is Paul.

Let me kind of go through segment by segment and tell you what's in other.

In international regulated, that $0.11, $0.06 is depreciation and $0.05 is taxes, income taxes.

In the $0.10 of other in supply, it's about $0.03 of depreciation, $0.03 financing, $0.02 nuclear decommissioning trust earnings being lower, and then $0.01 of truly other.

Pennsylvania regulated, $0.01 of depreciation and $0.03 to $0.04 related to bonus depreciation that I talked about, that wouldn't continue into 2012 because of the way the Pennsylvania interpretation was worded, and then in Kentucky, regulated other, $0.02 is depreciation and $0.01 is a mix of other items.

Thank you very much.

Your next question comes from the line of Paul Fremont from Jefferies.

Your line is now open.

Just a clarifying question.

If you were not to do anything either to issue shares or repurchase shares, can you just give us a sense of what the diluted -- average diluted share count will look like in 2014, given the converts?

Given the converts.

We move from 553 million to 586 million in 2013.

Let me take a quick look.

586 million in 2012.

So it goes 615 million in 2013.

Now that does include a modest amount of additional equity, so the DRIP and the management comp is in there.

Okay.

So if you back off probably call it 10 million shares from that you're closer to 610 million.

And then in a year like 2014 you asked for which is 664 million you would probably have to back off 20 million to 25 million shares from that.

So you're closer to --

That would be like 640 million, right?

640 million, right, in that zip code.

Thank you very much.

We have time for one further question.

It comes from the line of Michael Lapides from Goldman Sachs.

Your line is now open.

Just want to ask quick questions on the regulated side.

First, Kentucky, you mentioned you're going to file this year in Pennsylvania.

You still planning to file this year in Kentucky?

That's the first question.

Second question, on the bill in Pennsylvania and the new alternative rate making process can you give a little color in terms of how that would be implemented?

Is it like a track or a formula rate plan, or is it just a true multi-year forward test year?

The way we read it, seems like you almost have an option of an either/or but would love your thoughts.

Yes, of course we'll see what the model looks like from the PUC and any other provisions once they issue those.

On the Pennsylvania House Bill 1294, we do think there's an option there, you can either pick a forward test year or the disc type mechanism.

My understanding of it is that it would be trued up on a quarterly basis, so you would file and there's a limit of the 5% of your distribution revenues that can be filed under this, although you can ask for a waiver for additional if you'd like.

So -- and we think that's a pretty substantial amount to go for anyway, so I would think that we would file, as I mentioned earlier sometime early next year, and then we would probably lean towards the tracking-type mechanism, more so than the forward test year, but we haven't made that determination yet.

That's just based on our early read of that.

As it relates to Kentucky, we have not announced formally any plan to issue a, or to file a rate case.

Typically if we were to do so, we would need to file that about six months in anticipation of the targeted date for implementation, six to nine months, in that range.

As Paul mentioned, we're looking at ROEs in the 8%-ish range for this year and we'll -- obviously that's well below the authorized rate, so we're obviously going to be looking at our plans for filing a rate case for next year in the next quarter or so.

But we haven't made that decision yet.

Meaning you're looking at filing -- you're going to look at it in the next quarter or so, about whether you would want to file mid-year this year or about whether you would want to wait until filing sometime in 2013?

Correct.

But I guess with -- assuming the 8% holds I would say it's probably more likely that we'd file for rates to be effective 1/1/2013, but again, we haven't made an official notice or filing yet.

Got it.

Okay.

Thank you.

Presenters, I turn the call back over to you for any closing remarks.

Thank you, operator.

Well, thank you all for being on the call.

I'd just offer maybe three important points that the team I think has covered today.

One, it was -- obviously 2011 was a good, strong year, 16% or so total shareholder return.

I think, as Bill mentioned earlier, the range for 2012, feel good about the midpoint of that range at $2.30.

And I think to Paul's comments, we feel that, although, obviously natural gas prices are staying down, the reason we moved the Company in this direction is precisely to be able to perform, and hopefully grow earnings during a sustained period of low gas prices.

And at the same time, we're growing our dividends so that people that dividend is important to, they're being paid that dividend while we wait for probably a couple years for prices to start to move up.

But they will move up, given the ultimate retirement of coal and demand picking back up.

So I think we feel as a whole, that the Company's positioned very, very well to face the future, and we feel pretty good about where we sit today.

So thank you all for being on the call, and it's been great working with all of you.

Take care.

This concludes today's conference call.

You may now disconnect.